Thank you for visiting my blog. I post things I think will be of interest to high school students and teachers of economics. Please leave a comment if what you find here has been useful to you. THANK YOU!

Friday, February 25, 2011

Nice Graphic on how money earned by foreigners in the US and sent back home have been affected by the Depreciating Dollar...Standards of living are at stake!!

When foreigners in the US earn money and send some or all of it back to their home country (called a "Remittance"), the government tracks this flow of funds in the nations "Balance of Payments". The Balance of Payments has two sides to its ledger--The Current Acccount and the Capital Account. Remittances are recorded in the Current Account. When US Dollar is appreciating, this is a good deal for them. They are able to exchange dollars for more of their home currency than before the appreciation. In the graphic below, you can see this is what has happened with the currencies of Nigeria and Bangladesh. However, when the dollar depreciates, they can exchange for fewer units of their home currency. This is what has happened to the currencies of the Philippines, China and Mexico (see below)...Relative change in the value of currencies in the foreign exchange market affect many transactions around the world, not just exports and imports. Standards of living rise and fall at its mercy....

The world's currencies are gyrating, but the strains are being felt beyond financial capitals and corporate boardrooms. Millions of families in developing countries rely on relatives sending dollars, euros and other weakened currencies from abroad to prop up spending at home.

Lorena Baquillos's husband, Jimmy, is one of nearly 10 million Filipinos working around the world. She's managed to open a small grocery here on the money Jimmy sends home as a merchant seaman, but his dollar-based pay is translating into fewer pesos at home than it did a few years ago.

"I used to get 43,000 pesos every two months, but now that's down to 33,000," says Ms. Baquillos, 37, who uses her husband's earnings to feed and school their three children.

For years, the Philippines has encouraged its citizens to seek out work in other countries to keep the home economy afloat. Former First Lady Imelda Marcos used to serenade overseas Filipino workers while on visits to the Middle East in the 1980s.

Today, funds channeled home, or remittances, account for more than 10% of the Philippines' economic output, making it one of the most remittance-dependent countries in the world.

Many of these workers are in the U.S. or Britain or Italy, where currencies are struggling to recover from the global financial crisis. There are hundreds of thousands of Filipinos in places such as Saudi Arabia and Hong Kong, where currencies are closely linked to the ailing greenback.

Now, that lifeline is weakening as the dollar continues to languish. The Philippine peso has leapt 15% since the worst of the global financial crisis in 2008, to 43.41 pesos to the dollar. That outpaced a 13% gain in remittances to the country, in dollar terms, in the same period. This means fewer pesos for the families of overseas workers and a pressing need for the Philippines to rethink its remittance habit.

The pressure to adapt is acute in the town of Mabini, a two hours' drive south of Manila. Ms. Baquillos was manning the counter of her grocery store on a recent afternoon, hoisting sacks of rice onto her counter and counseling her customers in money matters. She urged one regular to start saving at least a fifth of her income.

Ms. Baquillos is tightening the purse strings and putting the savings back into a tiny mini-mart she runs across from the Western Union office in Mabini's town plaza.

It's an approach many here say needs to become widespread. "We are seeing a fundamental shift in the global economy," Philippines Finance Minister and the country's economic point-man Cesar Purisima said in a recent interview.

"We have to be honest about the consequences of that and educate people about what's going on."

The government, which was sworn in eight months ago, has started providing incentives for more outsourcing businesses to set up shop on the islands. The Philippines recently overtook India as the world's biggest supplier of voice-based call-center services.

Mr. Purisima and his colleagues also are trying to show their belief in the long-term value of the peso by issuing government bonds in that currency rather than in the dollar, as the country has long done.

There's much to be done, though, and little time to do it. Some economists expect the peso's gains against the U.S. dollar to accelerate this year, pushing the currency up faster than currencies such as Thailand's baht or Malaysia's ringgit, which have already hit multi-year highs.

French bank Credit Agricole S.A. forecasts the peso will appreciate 5.6% over the course of the year, and some analysts reckon it could break 40 pesos to the dollar. As recently as 2005, one dollar could bring 56 pesos.
Families depending on remittances in the Philippines are feeling the pinch, especially with inflation from rising food prices further crimping their spending power. Adding to the problem, the appreciating peso is pushing up the cost of Philippine exports compared with exports from competitors such as China, which has prevented its yuan from rising as quickly as currencies in Southeast Asia or Latin America.

In towns across the archipelago, local efforts are underway to help people find new ways to make money in their own backyards.

In Mabini, for example, store owner Ms. Baquillos and other remittance recipients have banded together to put on a musical comedy show about financial management and starting small businesses.

Featuring the misadventures of an overseas worker, the show focuses on family and responsibility, says Ms. Baquillos, and also on how hard it is to work thousands of miles from home, not knowing how much your paycheck will be worth from one week to the next.

"I'm so conscious now of what things cost, and think all the time about how all that money spent on fast food and the latest phones could have been used to buy a case of beer or a sack of rice for the store," says Ms. Baquillos. "We can't just rely on remittances any more."

The challenge for the Philippines is to prepare for a world in which the dollar is less desirable.

"People should try to become more entrepreneurial," says Mr. Purisima, the finance minister. "In the future, if we are to sustain growth, we need to find ways to help people do more here because we can't rely on remittances for ever."

It won't be easy. Unemployment is widespread at 6.9%, and under-employment—defined as people who work only part-time or with minimal incomes—is measured locally at 18%. Large numbers of Filipinos are still leaving in search of better prospects elsewhere because of the dearth of opportunities in a country where the average per capita income is around $1,790 a year.

Each day, hundreds of seafarers throng around Rizal Park in central Manila hoping to find work from the recruitment agents who fleetingly pass through the area.

"The dollar situation is bad, but for us there's no real alternative. We'll just have to cut our expenses where we can," says Mathias Abangan, a 35-year-old chef looking for work on a cruise ship.

Breaking the entrenched remittance culture is another obstacle. In some towns such as Mabini, nearly a fifth of the adults work abroad, and the main street is dotted with pawn shops, recruitment agencies and travel agencies.

The fear that there may be a greater dollar shock to come is a powerful motivator. Non-governmental organizations have enlisted activists like Ms. Baquillos in Mabini and others to spread the word about sound financial planning and how to build their small businesses instead of relying on a shrinking pot of remittances.

Atikha, one of these NGOs, offers job counseling and holds workshops on financial planning and entrepreneurship. Based in San Pablo, a 90-minute drive south of Manila, it was established by returning migrant workers and local religious leaders in 1995 amid worries about the impact of workers' long absences on their families.

For years, Atikha worked solely in the towns of San Pablo and nearby Mabini. Now, as the dollar and other remittance currencies slide against the peso, demand for the group's programs is spreading.

Atikha has established savings clubs for the children of migrant workers, and partnered with local banks and the Philippines' Department of Education to work with teachers who can help kids open their own bank accounts. Local companies such as Globe Telecom Inc., a telecommunications firm, and the Philippine central bank have lent support to dozens of other programs.

"We teach [participants] the language they need to have discussions about their household finances, which can be a very emotional subject," says Mai Dizon-Anonuevo, Atikha's executive director.

In some cases, Filipinos working overseas spend their paychecks on presents for their extended family back home, or else are asked to hand out cash to distant cousins or other family members. This can cause deep-seated tensions.

"We teach them how to say 'no,' which is very important in this culture, where extended families can quickly deplete the bread winner's earnings. It's almost like an intervention," Ms. Anonuevo says.

There are some early success stories. Lilian Brul, a native of San Pablo, says Atikha's financial literacy programs transformed her life. In 2005, her husband, who works for a telephone company in Saudi Arabia, suffered a heart attack.

In its wake, Ms. Brul, now 48 years old, decided that she couldn't sit by and wait for remittances to continue rolling in. She started her own business raising fish in the lakes around San Pablo.
"The heart attack was a real eye-opener," says Ms. Brul, a busy woman with long black hair who spends much of her free time cooking at the local Roman Catholic seminary. She began with 35,000 pesos—around $636 at the time—which she used to buy two large cages set in one of the seven lakes surrounding the city.

Ms. Brul expanded the business after attending one of Atikha's workshops and now owns 16 fish cages, each of which can hold three to four tons of tilapia. She also employs four fishermen and four farmers on new lots of land which she leased last year.

"We don't have to worry so much about the exchange-rate fluctuations anymore," she says. "And I've told my husband he can come home any time he likes to retire, and he says he'll do that next year when he turns 50."